Dividend Stock Showdown: Pfizer vs. Merck (PFE) (MRK)

Operational improvements should lift shares in these stocks

By Dan Burrows, InvestorPlace Feature Writer

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It’s an especially tough time for blue-chip pharmaceutical companies like Pfizer Inc. (NYSE:PFE) and Merck & Co., Inc. (NYSE:MRK). But as quarterly reports proved once again, PFE and MRK might be down, but they are hardly out.

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And that goes double for anyone depending on Pfizer stock or Merck stock for the income. Both companies pay higher-than-average dividends. As true blue chips — Pfizer stock and Merck stock are both component of the Dow Jones Industrial Average — investors can rest assured that the dividends will keep coming.

Perhaps most importantly, neither of these giant pharma stocks is having a bad 2015 so far. Indeed, PFE is up 10% for the year-to-date to outperform the S&P 500 by 9%. Merck stock is up nearly 6% on the year after running no better than market perform earlier this year.

The price gains are significant. After all, between blockbuster drugs coming off patent and a strong dollar, PFE and MRK face some serious challenges to revenue growth. And yet both companies appear to managing those headwinds reasonably well, as their most recent earnings reports attest.

Indeed, Pfizer stock and Merck stock trade at premiums to their own five-year averages. That suggests increased optimism on the part of investors, since they’re willing to pay more for future earnings.

As negative as the headlines might be for phrama stocks, PFE and MRK are proving to be battleship dividend-payers with a chance of price appreciation too.

But which one is better? Let’s look at the contenders:

Dividend Stock Showdown: Pfizer Inc. (PFE)

pfeIn Pfizer’s case, quarterly results were supposed to be hammered by competition from the generic version of its Celebrex blockbuster drug. The strong dollar was supposed to compound its problems.

True, foreign currency exchange led PFE to reduce its full-year outlook — 60% of total revenue comes from overseas — but for the most recent period, the pharma giant easily beat Wall Street estimates against the very same problem.

Earnings came to 51 cents a share, better than analysts’ expectations of 49 cents, according to a survey by Thomson Reuters. Revenue came to $10.9 billion, compared to a forecast for $10.7 billion.

Operationally, PFE appears to be doing OK. True, PFE could use blockbuster drugs emerging from its pipeline, but that doesn’t mean it’s bereft of growth if it doesn’t. The recent $17 billion acquisition of Hospira, Inc. (NYSE:HSP) sees to that.

On the equity income side of things, PFE has about twice as much free cash flow after paying interest on debt than it disburses on dividends annually. With a current yield of 3.2%, investors receive a decent payout while they wait for the currency headwinds  to subside.

Dividend Stock Showdown: Merck & Co., Inc. (MRK)

MRKIf anything, MRK should raise its dividend. It has more than enough cash firepower to do so. Furthermore, Merck stock has a payout ratio of just 43%, while PFE sits at 73%. The five-year average yield on the MRK dividend is higher, too, at 3.9% compared with 3.1% paid today.

Merck saw profits tumble 44% in the first quarter, but a promising pipeline and operational efficiencies allowed it to raise its earnings forecast. As underwhelming at the performance of Merck stocks has been this year, shares should will pick up steam from here for a couple of reasons.

In addition to the better outlook, the biggest weight on Merck stock this year has been lifted. The Food and Drug Administration concluded that MRK’s most important blockbuster drug — Januvia for diabetes — doesn’t increase hospitalizations for heart failure.

The overhang of those safety concerns has been so severe that Merck stock jumped more than 5% on the good news. As for the strong dollar, MRK figures that improved operational performance will cancel out any hit from foreign exchange.

The Verdict

MRKThe strong dollar remains a concern for both PFE and MRK, and that will continue to temper price appreciation.

But thanks to operational improvements, both names appear good for market-beating gains over the remainder of the year. Add in the dividends, and MRK and PFE are solid choices for total return.

If you has to pick just one, MRK stock probably has more upside because of the way it’s been held back all year.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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